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Sole Proprietorship—Is this Popular Business Structure Right for You?

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Sole Proprietorship—Is this Popular Business Structure Right for You?

If you’re starting a business, you may be wondering how to legally structure it. Should you incorporate, become an LLC, or operate as a sole proprietor?

Over 70 percent of U.S. businesses are owned and operated by sole proprietors or sole traders.

But what does being a sole proprietor involve and is it the right structure for your small business? Here’s what you need to know about the advantages and disadvantages of being a sole proprietor.

What is a Sole Proprietor?

A sole proprietorship is basically an unincorporated business owned and run by one individual (no partners are involved), with no distinction between the business and its owner. As a sole proprietor, you are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.

A sole proprietorship is the easiest business structure to form (you only need to get a license or permit and register your business with your local government) (hence its popularity). It is also a simple structure to maintain with few forms and little business administration needed. Many freelancers, consultants and independent contractors operate as sole proprietors for ease and convenience.

SBA’s Sole Proprietor Guide offers more details about the process of starting a business as a sole proprietor and the steps you’ll need to follow.

What Are the Advantages of Being a Sole Proprietor?

As mentioned above, the ease of starting and operating a sole proprietorship is one of the reasons this business structure is hugely popular. Also, sole proprietors are relatively unencumbered by government regulations and can run their business autonomously without the need to report to partners, shareholders and board members. You control all your own decisions and the money you make.

Sole proprietors have the benefit of reporting tax on any income earned through their own personal tax return, rather than filing separately as a business – which can save time and hassle. You also won’t need to prepare a balance sheet for your company.

Sole proprietors also have a lot of flexibility when it comes to their careers. You can easily close your business without too much bureaucracy, or work on a full or part-time basis for another employer without worrying about answering to anyone about your own business affairs (aside from your clients, of course) – another reason this is a popular option for freelancers, many of whom hold down two jobs!

What About the Disadvantages?

One of the reasons many new business owners seek to incorporate instead of being a sole proprietor is the liability issue.

You may not think now that you need protection against liability, but what if a client holds you in breach of contract or threatens to sue you? Can you afford to put your personal assets at risk to satisfy any claims against your business? As a sole proprietor, there is no legal distinction between the owner and the business. This means that you are personally liable for all business losses and debts. Business incorporation can limit your liability as a business owner, essentially putting your personal assets off limits if anyone brings a judgment against you. So sole proprietors are inherently exposed to risk that incorporating as a corporation or limited liability company can help alleviate.

Other disadvantages can potentially impact your bottom line and growth plans. For example, banks typically require that businesses incorporate before they’ll lend them money, leaving you to rely on savings, credit cards and other sources of capital. Then there’s the perception issue – being an incorporated business can give you a more professional appearance to potential clients.

Finally, because you aren’t required to produce financial statements or a balance sheet, your financial controls might not be as sharp as the need to be and this could be detrimental in the long term.

The Bottom Line

If you are starting a business, operating it as a sole proprietor can afford many benefits:

Liability – If you run a business that could expose you to risk in the form of debt or lawsuits (e.g., industries such as a child care or a food service business), then operating as a sole proprietor could leave your personal assets vulnerable.

Raising capital can be hard

Lack of financial controls

Lack of professionalism

If you still have questions, there are a number of counseling resources in your community that can help, including Small Business Development Centers. Find them here.

About the Author:

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

lisa yah | 10/12/2013 - 3:45 am

Every corn has two sides，Sole Proprietorship is a double-edged sword.We must deal with it correctly .

BusinessLawyer | 8/20/2013 - 7:42 pm

Selecting a business structure is a very important decision that can greatly affect your business. Below is a general idea of the different structures. Business entities are creatures of state law and every state is different. You should always consult with a business attorney and an accountant.
A sole proprietorship is owned by one person and there is no legal distinction between the owner and the business. All profits and losses are accrued to the owner, and subject to taxation. In a partnership, owners share the profits and losses associated with the business. Corporations are the most common form of business organization. It's given legal rights as a separate entity from its owner, thus keeping its owner from being liable if the company is sued. Corporations are owned by a group of people known as shareholders. An S Corporation is similar to a corporation, in that business owners have limited liability in the company. However, S corporations generally do not pay income taxes, but rather, the business' income or losses are passed along to shareholders. A Limited Liability Company (LLC) is the hybrid of a sole proprietorship and a corporation. Like a corporation, the owners of an LLC have limited liability, but is also shares the pass-through taxation of a sole proprietorship or partnership (meaning, if you own an LLC, you are only taxed once for your business).

madein | 7/4/2013 - 11:56 pm

I enjoyed your article, you write very detailed.I am currently the owner of a small company, after reading your post, I've been thinking a lot.In order to succeed is a very difficult road.
This post was edited to remove a link. Please review our Community Best Practices for more information about how best to participate in our online discussions. Thank you.

khaingoc | 3/28/2013 - 7:36 am

I enjoyed your article, you write very detailed.I am currently the owner of a small company, after reading your post, I've been thinking a lot.In order to succeed is a very difficult road.A company that wants to survive needs a lot of factors such as: financial, partnership, thinking boss, convenient location, capture the market demand, ...
Finally, I thank you for sharing your opinions.
I very bad English, I hope you understand it.

KochandBrim | 3/8/2013 - 5:37 pm

Definitely something to think about
Many of my friends who take in most of their income through 1099 chose to form a LLC just to avoid the liability. They dont really work in a field where people get hurt but still...its always good to have a bit of protection on your side
Theres no lack of fickle lawsuits in the United States, and you can never really anticipate what a jury will decide

49th Street Bai... | 3/8/2013 - 12:05 pm

The article was short but helpful. The one thing that puzzle's me is about liability. Forming an LLC or Corp is supposed to protect you from personal liability. However, I have heard about attorney's being able to pierce the corporate veil conserning liability. This article and many others do not tell the whole story. What can be done to protect 100%?
This post was edited to remove a link. Please review our Community Best Practices (http://www.sba.gov/community) for more information about how best to participate in our online discussions. Thank you.

JGabriel | 3/15/2013 - 11:32 am

Hi there, I recommend reaching out to an attorney for specific guidance.

The May Firm | 3/4/2013 - 4:38 pm

Brief, but extremely insightful article on the advantages and disadvantages of sole proprietorship business structure. However, many new business owners (and the numbers continue to increase) are choosing to open an LLC instead of a sole proprietorship. The single fact of having a limited liability and being a separate entity from your business is plus for entrepreneurs. Thank you for the article.

Dr. Bill | 3/4/2013 - 3:25 pm

We feel strongly that the separation of the business affairs from personal affairs is important for just about any small business. An LLC or corporate structure can help shield personal assets from business liabilities, although it does not protect against errors that the business owner(s) may have personal liability for. It also reinforces that the business financial affairs are separate from the personal or family affairs. This helps to create a much more business attitude toward the business and reinforces the importance of profitability. The nonprofit resource network,
This post was edited to remove a link. Please review our Community Best Practices (http://www.sba.gov/community) for more information about how best to participate in our online discussions. Thank you.
, has a very useful matrix that shows the pros/cons and differences between these legal structures along with partnerships and other legal alternatives, how to file in each state, how to get an EIN and other related issues to consider (
This post was edited to remove a link. Please review our Community Best Practices (http://www.sba.gov/community) for more information about how best to participate in our online discussions. Thank you.
). Forming a legal entity does not have to be confusing or expensive. There are inexpensive private companies such as BizFilings that are available to help individuals understand the issues and requirements and provide the legal paperwork and filings, act as the legal agent, and help with annual filings. We agree with the comment about the importance of insurance to also help protect against business liabilities. Companies such as BusinessInsuranceNow can be a high value low cost resource to help understand needs and solutions as well.

Jerry Chau | 3/3/2013 - 10:46 am

Hello Caron, I appreciate your ability to address an enormous amount of business issues with clarity. In this instance, however, you are perpetuating the myth that incorporating or forming a LLC provides a shield against personal liability for a company owned and operated by a single individual. It does not. Most lawyers will sue the corporation and the owner personally, “piecing the corporate veil,” as it is called. The plaintiff's lawyer will show that the individual is acting as an individual --- not a corporate officer. Even when the plaintiff’s lawyer is unsuccessful in piecing the corporate veil, the business owner will still spend big bucks defending herself. My advice to small-business owners is to visit with an independent insurance agent and load up on personal liability insurance --- regardless of the kind of business entity you form. It will help you sleep better at night. (-: Jerry Chautin Business columnist & financing blogger SBA’s 2006 national Journalist of the Year Volunteer SCORE business counselor, Atlanta, Sarasota & Murphy, NC Follow me on
This post was edited to remove a link. Please review our Community Best Practices (http://www.sba.gov/community) for more information about how best to participate in our online discussions. Thank you.